Regulated tariffs add to scheme’s nonsense

Origin Energy
is right to complain that it could lose up to $40 million in the second half of this year due to the crazy system of subsidies for roof-top solar panels. But it hasn’t mentioned it could get most of that money back with interest in the first half of next year.

This is how it works. Under a system that could have been developed by Cuba’s state planning commission, the federal government forces energy retailers like Origin to buy certificates representing the power output from solar panels. Retailers must buy certificates either direct from householders or via installers and other market traders.

Retailers buy the certificates in proportion to the amount of power they sell across their business and the share of the nation’s total power that is produced from solar panels. Say roof-top solar produces about 10 per cent of the nation’s power – retailers must then buy certificates for solar power equal to 10 per cent of the total power they sell. This, in itself, does not worry retailers too much since they can and do just add the cost to punters’ power bills.

The problem arises because it is hard to estimate the required quota of solar certificates but, in all eastern states except Victoria, tariffs are regulated a year in advance. In fact, retailers can and increasingly do try to lure customers with special deals, but about half of all customers are still on these regulated tariffs which are calculated based on expected costs of power generation and delivery plus a margin for the retailers’ profits.

This year, regulated tariffs have been set too low due to a big underestimation of the solar certificate cost. The Federal Clean Energy Regulator last year guesstimated that, in 2013, retailers would have to buy solar power certificates equal to 8 per cent of their total sales. But in March, the CER realised its guesstimate of solar power output was too low and bumped the number up to 19 per cent. People keep installing more solar as panels grow cheaper and state and federal subsidies remain.

There are questions about why the CER keeps getting its guesstimates of solar power production so wrong. Meanwhile, regulators had already set regulated prices for 2012-13 assuming the low estimate of the required purchases of solar certificates.

So Origin is right to say it will lose out because it can’t raise prices to reflect the need to buy more certificates. But in NSW, from January, the regulator has said retailers will be allowed to pass through all the extra costs with interest. The price per megawatt hour will rise by $2.20. This is actually just a small cash flow issue for Origin in NSW.

Perhaps Origin’s main concern is Queensland where it is a big player but where price regulation has been especially politicised. The moral is that the uncapped and subsidised household solar scheme is crazy and doubly so when linked to a regulated tariff scheme.